Top African Gold Prospects: Brock Salier
Interview

The Gold Report: Brock, you cover many companies based in Africa. What do African countries offer that other jurisdictions do not?

Brock Salier: I would have to say geological prospectivity. African countries are relatively underexplored and underdeveloped. That means African exploration and mining companies have far greater likelihood of discovering new ounces and of expanding production at existing mines.

The other key is sovereign risk, which is relatively good in Africa. We define sovereign risk as the number of assets that have been nationalized or taken away from mining companies. When I compare Africa to Southeast Asia and the former Soviet Union, Africa scores much higher.

TGR: Are brokerages like GMP being forced to look at countries operating in Africa for growth?

BS: Quite the opposite. We have a choice of jurisdictions and we've chosen Africa as one of our focus areas. For us, the African asset base is attractive. We see more listed companies operating there and a lot more success stories relative to elsewhere.

TGR: Are there any traditional gold mining countries that you might take a flier on, perhaps Ivory Coast?

BS: Absolutely. We're actively working in Côte d'Ivoire. Despite recent civil unrest, the country has transitioned to a new democratically elected head of state. The geological prospectivity is so high that mining companies are flooding in. The asset quality is stunning. I would target the Ivory Coast as a favorite investment location.

Liberia and Sierra Leone are relatively underexplored compared to Ghana and Burkina Faso, both of which have democratically elected heads of state. Despite very recent civil unrest, Liberia and Sierra Leone are now stable, open for investing and have some really exciting targets.

Neighboring Ghana is much better known for its gold, yet it's also much more explored and the explorers have smaller licenses; the producing assets are more mature. The Democratic Republic of Congo (DRC), which has had an up-and-down history, is one of our favorite investment destinations because of the geological prospectivity.

TGR: What accounts for the increased stability in West Africa and what are your preferred jurisdictions there?

BS: Wealth generation has played a role in the region's stability. The wealth generated in Ghana in the last 20 years has made many of that country's neighbors want to emulate its success. To have ongoing, direct foreign investment, you need a sustained, peaceful state. There is an incentive for them to push toward stability.

From a geological perspective, my preferred destinations are Mali, the Kénieba inlier in Senegal and Burkina Faso. The Ivory Coast is another exciting destination, given its geological proximity to the highly mineralized Ghanaian gold belts and historic underinvestment. In the last 12 months, Liberia has seen a huge influx of gold juniors. I wouldn't be surprised to see exploration success increasing there.

TGR: In some regions, we are seeing project nationalization in various forms. Will that find its way into the African countries?

BS: I genuinely believe nationalization is not a major issue in Africa. Looking at the historic incidence of nationalization, it's not common in Africa. It did happen in the DRC with First Quantum Minerals Ltd. (FM:TSX). In the DRC's case, there is such a strong desire to create an environment suitable for foreign investment, it genuinely does not want to send a message of nationalization to the foreign community.

TGR: In your company models, you typically value gold companies using a gold price of $1,575/ounce (oz) of production and $80/oz in the ground. The gold spot price has been volatile lately, and your price per ounce of production might be considered high by some analysts. Do you plan to make any adjustments?

BS: It's important to point out that we use a gold price assumption rather than a forecast. We typically choose $1,575/oz as a stable price and then look at the sensitivity. We suggest that investors take their own view on the gold price.

Having spent a lot of time on new development projects in Africa, I see a lot of support at $1,100–1,200/oz because of supply constraints. The assets are maturing. The grades are falling. The diesel price is escalating, along with taxes and royalties in some places. Costs are higher.

TGR: Brokerages in Toronto typically use a 5% discount rate for companies operating in Canada. You use a discount rate of 6% for companies operating in Africa. Does that extra 1% account for the additional risk in Africa?

BS: Ironically, most European brokerages use a 10% discount rate for African gold projects. We use 10% for base metal projects, but 6% for gold projects because gold companies are far more scalable than other commodities. There are more deposits to be found. It's easy to develop gold deposits.

In response to the 5% vs. 6% question, we capture that difference in net asset value (NAV) multiples. When we value African gold companies, we use a variety of NAV multiples. While we use a higher discount rate, we account for that by using a different NAV multiple.

The key thing for any investor looking at a gold analyst's research is to make sure the discount rate and the gold price are consistent. We use the same discount rate and gold price across the firm. Then we look at our valuations relative to our coverage universe.

TGR: Would you consider your model aggressive?

BS: I would say not, because of the huge support in the gold price and the huge demand for gold mining companies. Gold equities are outperforming other mining equities because there is a lot of investment support and gold companies are the easiest to understand and take into production. They're the most scalable. On that basis, gold equities definitely trade at a premium to many base metal and bulk commodity producers.

TGR: Let's get into your coverage sector. You cover African Barrick Gold Plc (ABG:LSE), which operates the Bulyanhulu gold mine in Tanzania. In your Oct. 20 research report, you basically said that African Barrick is seeking a takeover target. What sort of catalyst would that be for the company's shares?

BS: The key catalyst to any gold producer is increased production on an accretive basis, meaning increased production on a per-share basis. African Barrick struggled to increase production in Tanzania with mature assets. Given its strong cash balance, I believe the company will be able to buy production without issuing new shares. That could prove to be a tremendous, positive catalyst for the stock.

TGR: Which juniors would be likely targets?

BS: We believe a company like African Barrick will look for juniors in a stable country, with numerous future growth opportunities, existing production and growth projects. As outlined in our initiation report the two that stand out are Teranga Gold Corp. (TGZ:TSX; TGZ:ASX) and Avocet Mining Plc (AVM:LSE). Both have existing production in the 120–250 thousand ounces per year (Koz/year) range, lots of exploration upside and, most importantly, would be affordable with capitalizations well under $1 billion (B).

TGR: Will African Barrick ever get to the large-cap producer status of some of African players like IAMGOLD Corp. (IMG:TSX; IAG:NYSE) or Gold Fields Ltd. (GFI:NYSE)?

BS: If it did acquire a junior producing 200 Koz/year, production could very quickly lift over 1 million ounces per year (Moz/year). That immediately takes it to production well above a company like Randgold Resources Ltd. (GOLD:NASDAQ), a far higher-rated peer in London.

Looking to the future, it would be all about additional acquisitions and exploration. We'll have to wait and see what acquisition strategy it executes.

TGR: Let's move on to Banro Corporation (BAA:TSX; BAA:NYSE), another Canada-domiciled company. Banro reported its first gold at Twangiza in early October. Banro is a preferred stock you cover. What are the catalysts for Banro?

BS: Banro is an extremely lucky developer and producer in that, in addition to the Twangiza mine, it has two large, undeveloped gold assets that, geologically, should become mines: Namoya and Lugushwa.

In our recent initiation we noted that the key catalysts for Banro are taking its second and third projects, Namoya and Lugushwa, into production. In the short term, the milestones are those that enable progress toward production. We expect the final engineering study for Namoya around year-end, with construction to start early next year. Lugushwa is expected to release a revised resource around year-end and we expect a preliminary economic assessment shortly thereafter. That means analysts will be able to value Lugushwa on a discounted cash flow (DCF) basis for the first time.

TGR: It will take about $120 million (M) in capital expenditures (capex) to bring Namoya into development. When is production slated to start?

BS: We expect the company will start construction around March 2012. There will be a 12-month build, so it can get a targeted first gold pour around March 2013.

TGR: Does Banro have enough money to fund that capex for 12 months?

BS: Namoya's capex estimate is around $120M. We recently published a report in which we estimate that Twangiza should generate $140M of free cash flow to fund Namoya. Obviously, the budgets are difficult to tie down. But broadly speaking, Banro should be able to cover the capex at Namoya.

TGR: How is production going at Twangiza?

BS: The company has only just announced its first pour; we'll have to wait and see. When I visited, I was impressed with the engineering team and the design and build, which was being done extremely quickly in an arduous environment. No doubt there will be teething issues, but I'm confident that ramp up should happen in line with target at year-end.

TGR: You mentioned that the DRC nationalized some of First Quantum's assets, and Banro had its exploration concessions seized back in the early part of the last decade. What kind of relationship does Banro have with the DRC government?

BS: Banro works extremely closely with the government. The government is very happy to see new mines in the eastern part of the country for the first time in modern history and the first modern gold mine to be commissioned as well. The DRC is seeing a big influx of skills, as well as taxes and royalties being paid. In the long term, driven by the copper industry, the DRC sees how well it can do from mining and how it can help the country. My view is that the government intends to maintain a peaceful outlook and to keep the mining industry going.

TGR: GMP follows exploration companies like Loncor Resources Inc. (LN:TSX.V; LON:NYSE.A), Roxgold Inc. (ROG:TSX.V) and Orezone Gold Corporation (ORE:TSX), plays that are not getting support in the market.

BS: Valuation is very difficult. As a geologist by training, I pick producers where I think the resource is, or has potential to be, big enough to be mined and where the geological conditions support additional discoveries.

Loncor, Roxgold and Orezone have already drilled what will eventually be delineated as mineable projects. All have a very good likelihood of finding new projects, although that is always more speculative.

It is difficult to value an exploration company on a DCF basis, so we use the enterprise-value-per-ounces-delineated method and compare that to the peer group. Most listed African pre-producers trade at an average of $80/oz. Then we put a higher valuation on those deposits that have more readily mineable ore—such as higher grades or open pit mineable—and a lower valuation on those with lower grades or more difficult jurisdictions or mining conditions.

TGR: Loncor is a preferred stock you cover; its Makapela project in the eastern DRC doesn't have a resource yet. How big do you think that resource could get?

BS: I think Makapela will define more than 1 Moz. The company still has a lot of drilling to do and we should see results in mid-2012.

The beauty of Makapela is that there are almost certainly subparallel zones there. Thinking about the next one to three years, I'm convinced it will find more zones and grow over time. From what we've seen so far, the potential for more than 1 Moz is there. And, the grades at Makapela are stunning.

We often use the adage that grade is king, and certainly at 9 grams per ton (g/t) even over the narrowest 4–5 meter (m) width, Makapela is very easily mineable mechanically and economically. That should give good returns.

TGR: How does Makapela compare to projects belonging to Roxgold and Orezone?

BS: It's very similar to Roxgold's resources. Roxgold recently found slightly narrower veins, but extremely high grade. It's very different from the resources you typically find in Africa, which are more likely to be around the 2 g/t range, open pit mining and much larger deposits.

One of Loncor's advantages is its joint venture with Newmont Mining Corp. (NEM:NYSE). That agreement targets a 5 Moz, lower-grade, perhaps 2–3 g/t, open pit deposit. Between Makapela and the joint agreement, Loncor has a strong twofold strategy.

TGR: And Orezone?

BS: Orezone fits in a new breed of deposits we're seeing in Burkina Faso, alongside Volta Resources Inc. (VTR:TSX). Those companies have relatively lower grades at 1 g/t, but huge size. All of them have potential for 3–5 Moz. The attraction of those deposits is not the grades, but the sheer scale.

TGR: Very few people know much about Burkina Faso. Can you give us a brief overview of its stability?

BS: I was in Burkina Faso last week. It had issues earlier in the year, when civil unrest in Côte d'Ivoire interrupted the supply chains for staples such as fuel and food into Burkina Faso. As a consequence, food prices went up, and the local populace grew uneasy. Now, the supply lines have been re-established and the populace is very supportive of the long-term head of state, Blaise Compaoré. The mining industry is flying ahead. Burkina Faso is one of the best destinations in Africa to invest in from stability and geological prospectivity bases.

TGR: Some of our readers like base metals plays, and you follow a small copper play in the DRC called Tiger Resources Ltd. (TGS:TSX; TGS:ASX). What brought you to that name?

BS: In this economic climate, I believe it's important to pick mining stocks that don't have large, upfront capital requirements. That can often be an insurmountable hurdle if the share markets aren't open for fundraisers.

We recently initiated coverage on Tiger Resources, which alongside all the copper producers in the DRC, has the advantage of a small, exceptionally high-grade starter resource. For less than $30M capex, the company built a plant producing 30,000 tons per annum of copper in concentrate. Similar to Banro's expansion model, Tiger self-funds a large component of its expansions. We love the geology of the DRC. We think it's far more prospective than the much-lower grade copper deposits in Botswana, and for Tiger that means there is a lot more opportunity for Tiger to pursue a merger or acquisition, now that it's an established producer.

TGR: Do you have any other preferred stocks you would like to share with our readers?

BS: One of my preferred stocks is Sable Mining Africa Ltd. (SBLM:LSE). Its current market cap is $150M. It has a strong balance sheet, $110M back in March. As we outlined in our recent initiation report, it's about to start drilling on what I think are the most exciting and largest iron ore exploration targets in West Africa. Looking at its two targets in Liberia, I see potential for some of the largest iron ore discoveries to be delineated in the last decade. They are both within 70 kilometers (km) of existing railway, so there is good infrastructure as well.

TGR: That is a significant distance. Will Sable be building rail?

BS: Absolutely. Many of the iron ore deposits being discovered in West Africa are 150km or more from the nearest port or existing rail project. So, while a 70-km railway sounds like a lot, compared to other West African projects, it is far closer than most. The attraction is the potential for in excess of 10 billion tons (Bt) of iron ore, which is a phenomenal amount and more than warrants building 70km of railway.

TGR: Sable also has some coal projects in its portfolio. What can you tell us about those?

BS: Its South African project is almost ready for a bankable feasibility study to fund construction. Its project in Zimbabwe is even more exciting. Its portfolio there has the potential for 4 Bt of thermal coal with coking coal. Although Zimbabwe is going through a period of reform, we believe the current investment climate is suitable for exploration, which enables Sable to undertake exploration and feasibility studies. As such, for Sable investors, the key value lies in the iron ore portfolio.

TGR: What is the upcoming news flow for Sable?

BS: The company has spent some 18 months acquiring projects, undertaking geophysics and establishing road infrastructure to drill the targets. This means there has been limited news flow, but with the drilling starting in January across the iron ore portfolio in Liberia, we expect the news flow will significantly pick up.

TGR: Is there a good spot on the Internet where people can go to see new resource stories coming to market?

BS: It's very difficult to track. Probably the best source for people in North America is the Producers and Developers of Canada International Convention Trade Show & Investors Exchange, which is a huge attraction for these stories.

TGR: Brock, thank you for your time and insights.

Brock Salier is a mining analyst with GMP Securities Europe.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Loncor Resources Inc., Roxgold Inc., Orezone Gold Corp., Banro Corporation and Gold Fields Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Brock Salier: I personally and/or my family own shares of the following companies mentioned in this interview: Sable Mining Africa Ltd. I personally and/or my family am paid by the following companies mentioned in this interview: None. Brock Salier was not paid by Streetwise for participating in this story.
4) GMP Securities Europe does not cover Gold Fields. Orezone and Iamgold are covered by GMP but not by Brock Salier.
5) Brock Salier has seen material operations of the following companies he covers mentioned in this interview: Avocet Mining, Banro Corporation, Loncor Resources, Sable Mining Africa and Tiger Resources.
6) GMP Securities Europe LLP and/or any of its group affiliated companies has, within the previous 12 months, provided paid investment banking services or acted as underwriter to the following issuers mentioned in this interview: Banro Corporation, Loncor Resources Inc. and Sable Mining Africa.